First-quarter GDP barely rises, but Fed says growth gaining momentum

1st-quarter GDP expands at 0.1% pace

Spencer Platt, Getty Images

After a modest and choppy U.S. economic recovery, many analysts think the economy could see significantly stronger activity this year — about 3% versus an average of a little more than 2% since the recovery began. Above, an American Flag at a ferry terminal in New York City.

After a modest and choppy U.S. economic recovery, many analysts think the economy could see significantly stronger activity this year — about 3% versus an average of a little more than 2% since the recovery began. Above, an American Flag at a ferry terminal in New York City. (Spencer Platt, Getty Images)

Don Lee

Fed plans to continue to trim its bond purchases at a pace that would end the stimulus program by year-end

WASHINGTON — The nearly 5-year-old recovery stalled in the first quarter, but the Federal Reserve said consumer spending and economic growth are picking up momentum following a harsh winter.

In an upbeat assessment, the Fed said Wednesday that it would continue to trim its bond purchases, aimed at lowering long-term interest rates, at a pace that would end the stimulus program by year-end.

The central bank left its benchmark short-term interest rate near zero and made no other changes to its policy.

The Fed's unanimously adopted statement was issued at the conclusion of a two-day meeting and just hours after the Commerce Department reported a much-weaker-than-expected estimate of first-quarter economic growth.

The report showed that gross domestic product, or total economic output, expanded at a mere 0.1% annual pace in the first three months of the year, one of the weakest growth rates since the recovery began in mid-2009. GDP rose at a solid 3.4% annual rate in the second half of last year.

We have already seen a marked improvement in the monthly data for March, which suggests that there will be a big rebound in second-quarter GDP growth.— Paul Ashworth, chief U.S. economist at Capital Economics

The bigger-than-expected slowdown — analysts had forecast growth of about 1% on average — was mostly the result of a sharp decline in business investment and net exports. Analysts said the unusually cold conditions across much of the country contributed to the pullback in residential building and investments for plants and equipment, something that the Fed also underlined.

Fed officials and many private economists, however, are predicting that economic growth will turn back up this quarter and strengthen as the year progresses.

Even with frigid weather dampening home-building and car sales earlier this year, Wednesday's report showed consumer spending slowed only modestly from the fourth quarter, thanks to stronger outlays for healthcare and other services.

"As the weather has returned to seasonal norms, we have already seen a marked improvement in the monthly data for March, which suggests that there will be a big rebound in second-quarter GDP growth," said Paul Ashworth, chief U.S. economist at Capital Economics.

After a modest and choppy recovery, many analysts think the economy could see significantly stronger activity this year — about 3% versus an average of a little more than 2% since the recovery began.

That's largely because government cutbacks and political turmoil have receded, while U.S. households are on firmer footing with their debts pared down, credit flowing a little more freely and the housing and stock markets edging higher.

Still, there are uncertainties, particularly related to business spending. Although home construction is likely to pick up, company spending for equipment, which fell in the first quarter, has continued to lag.

Moreover, the outlook for trade is hazy. China's economic reforms remain bumpy, and geopolitical tensions have added to the risks of a global economy in which Europe is growing only modestly and once fast-running developing economies have slowed.

In the end, much of what happens to American economic growth is likely to come down to jobs and incomes.

Like the broader economy, job growth weakened early in the winter, but now appears to be returning to the moderate pace of the last couple of years. The government's jobs report for April will be released Friday. Economists are expecting, on average, that employers created 215,000 new jobs last month, up from 192,000 in March.

Incomes are showing signs of climbing, but only slightly, as unemployment is still high and competition for jobs remains stiff.